The Math of Company Ownership

The Supreme Court is at it again with their whimsical decisions. They have decided to change the rules in the middle of the game. They have decided that ownership is only achieved through common stock and not preferred stock. So with their new formula, PLDT is now 64% foreign owned. And the same goes for more than a few other companies.

How they came to that decision boggles me. A company is the sum of its assets. And assets are purchased with equity and possibly debt.

A = D + E

In accounting both common stock andpreferred stock are owner’s equity.

A = D + (CS + PS)

Debt is borrowed money and is paid off with interest. Equity is owner’s money and shares benefits from earnings via dividends or suffers from losses. And preferred stocks get first dibs at dividends. If you look at it this way, preferred stock is more ownership than common stock.

Now, if the company is to be dissolved and the assets liquidated or sold,

A = D + (PS + CS)

$$$ = D + (PS + CS)

Debtors collect first,

$$$ – D = PS + CS

$$ = PS + CS

followed by preferred stockowners,

$$ – PS = CS

$ = CS

and finally common stock owners.

$ – CS = 0

If you look at it this way, preferred stock is more ownership than common stock. In fact the only thing going for common stock is it’s decision-influencing attribute via stockholder vote.